Question

Common Stock $1 par $14,350,000

Paid in Capital in excess of par - common stock 6,520,000
preferred 8 1/2 % stock, $50 par
Paid-in Capital in excess of Par - preferred stock 2,400,000
Retained Earnings 9,543,000
Treasury common Stock (at cost) 695,000

The total stockholders' equity of Rosbottom Corporation is
a) $24,805,000
b) $34,348,000
c) $35,043,000
d) 35,738,000

Answer 1

An investor determines the value of a share of Babble, Inc. by calculating the present value of anticipated dividends over the next two years. This calculation requires a discount rate that reflects the investor's required rate of return.

Step-by-step explanation:

When contemplating the purchase of shares of stock in a company, investors must compute the present value of expected future dividends to decide what price to pay per share. In our example, Babble, Inc., plans to distribute all profits as dividends to the shareholders at different points over the next two years before the company is disbanded.

The value an investor would pay for a share of stock in Babble, Inc., is the present value of the expected dividends. Assuming an investor requires a certain rate of return, they would discount future dividends back to today's dollars to find out what they should pay for the stock today. This is calculated using the formula for the present value of a series of cash flows, adjusted for the required rate of return

For instance, if an investor expects to receive $75 per share (this figure is an illustrative example) over the next two years and requires a 10% rate of return, they would calculate the present value of each year's expected dividends (for example, $75 year 1, $82.5 year 2) and sum them up discounted by the 10% rate for each year to get the price they would be willing to pay for the stock today.